We see “Amazon can’t beat this one” ads every now and again for retailers — that was part of Oxford Club’s push for Planet Fitness earlier this week, for example — but this one is generating quite a few questions… and I haven’t written about one of Hilary Kramer’s ads for a while, so it floats to the top of the slurry pile.
Here’s how the email caught our eye…
“What’s the one thing the world’s richest man—Amazon’s CEO Jeff Bezos—is completely freaking out over?
“It’s a Big Box retailer… and the one competitor Amazon can’t crush.
“Its business model can’t be taken online and undercut by Bezos and his company.
“And its earnings are growing 5X faster than Amazon’s.”
I’m guessing Mr. Bezos is not exactly “freaking out” about anything these days — but, of course, we still want to know which big box retailer Kramer is pitching, and whether it really stands out as being “Amazon-proof.”
And better yet, we’re also told that these shares are “bargain priced” because they’re 20% off their highs (lots of stocks are “bargains” if that’s your criteria, but we’ll suspend our disbelief until we figure out the name).
The ad itself even has a cute little “Star Wars” style headline…
“The Big Box Strikes Back: Revenge of the Retailer”
So, assuming you’re not hankering to hand over $99.95 to Eagle Financial for your subscription to GameChangers (to be auto-renewed at “the prevailing rate… which seems to be $249 at the moment”), let’s check out the clues and see what we can learn for you…
“This disruptive retailer has a temporary low price, because they’re financing a massive expansion… one that will triple their number of stores, preparing them for Netflix or Apple-like growth.
“But paying for that expansion cuts into short-term profits. So its price is briefly down… creating a ground-floor opportunity for an explosive profit-push in the near future.”
Retailers have a hard time ever seeing “Netflix-like growth,” of course, because they have costs that march higher right with their revenues… but they can certainly show nice growth, particularly if they’re in the midst of a long expansion surge and can finance that expansion without crippling their operating results. So we can hope… but let’s get some more clues first:
Kramer also cites some other sources, including Seeking Alpha (which, of course, is an essentially un-edited blogging platform these days… arguably better than Forbes.com, but so huge that you can find support for any opinion you wish in their pages) and, more promisingly, Barron’s… here’s the quote from Barron’s that she offers:
“… its stock offers a second chance to get in on the bottom floor of a compelling growth story.”
And apparently the Hodges funds are enthusiastic shareholders — more from the ad:
“Craig Hodges, the high-flying portfolio manager of five mutual funds, call this short-term dip a “gift,” and raves about this “second chance,” “high-growth” opportunity….”
Kramer goes on to say that this company’s revenue is projected to grow sixfold, though the graph she shares has revenue at just under a billion dollars now and climbing to just over $3 billion in 2024, which is pretty enticing but is definitely not “sixfold”
… I guess “sixfold” must sound better than “threefold.”
And there’s also a quote from the Chairman:
“As we open new locations, our ‘class of fiscal 2019’ is on track to be our most productive yet.”
So that’s good, as we’ve seen from Five Below (FIVE) and its big run, a company trying to aggressively grow from regional to national needs both good “same store sales” at its existing locations and an ability to quickly get new stores open and up to speed. (No, this isn’t Five Below being teased here, but that’s one that I own so it’s the retailer I’ve followed most closely over the past year or two).
What else do we learn about this stock? More from the ad:
“I call a ‘Picture-Perfect Disrupter’ ….
“Exploiting Amazon’s ‘Achilles Heel’ ….
“And they’re growing five times faster than their online foe.”
And we also get the big promises that fuel so many newsletter pitches:
“At these prices, a $5,000 investment can get you in cheap if you begin now… giving you the potential to amass a $1.01 million-dollar retirement portfolio in the coming years.”
No, I don’t know why she chose “$1.01 million” — presumably there was some math involved, or maybe they just thought that sounded more “real” than $1 million. That’s roughly a 20,000% return, which would, of course, be just lovely — she compares it to many of the stocks you can probably think of that have achieved huge long-term returns like that, including Apple, Netflix, Microsoft and Amazon, who had returns better than that over periods ranging from a dozen years (NFLX) to several decades (MSFT or AAPL).
These are the five criteria that Kramer says she uses to ID “picture perfect disruptor” stocks:
- Explosive revenue growth
- Ability to exploit rival’s “Achilles Heel” for a competitive advantage
- Ability to grow loyal customers with exclusive products not available anywhere else…
- Be priced under $25… so you can load up on shares at a low price, and ride the stock price upwards.
- It must be an established company. Most investors don’t realize this, but disruptive stocks are seldom startups. They’re proven. They’d have to be, in order to be disruptive, and ready to overtake their current market leaders.
And, of course, this stock meets those criteria — she says they have year over year earnings growth of better than 350% right now, which is where that “5X as fast as Amazon” part comes from.
It’s also apparently got something to do with home furnishings…
“Most people like to shop, but a website can’t possibly immerse you in the buying experience. You need to relax in the armchair before you buy it… Feel the rug under your feet… Hold a garden tool in your hands… Stretch out on a comfortable bed… You get the picture. You can do all that and more in this Big Box retailer.”
And apparently it has 50,000 exclusive items that create demand, so they must make their own stuff or otherwise “private label” products.
The “established” part, per Kramer is that they have been around for a long time but were bought out and “transformed into a big box powerhouse” five years ago.
We get a few other clues, including some chatter about their “international sourcing flexibility” and the fact that their stores break even after just two years, and are physically huge.
So what is the stock?
Well, here’s a fun surprise… this is At Home Group (HOME), and, coincidentally enough, the stock is getting CLOBBERED today.
I don’t know when Hilary Kramer started recommending this stock, but we started seeing the ads yesterday, on June 5. And last night, HOME released its quarterly earnings and slashed guidance, driving the stock down from about $19 yesterday to $8.50 as I type.
Wow. Just wow. We don’t run across these very often, but it is, at least, a newsworthy idea… and I wouldn’t expect that Amazon (or Wayfair, for that matter) is quaking in its boots at the threat from HOME these days, but is this a stock to buy after a 50% one-day crash? This is a nasty and more abrupt crash than in the past, but HOME has had some rough patches before — in fact, those “this is a gift” quotes are probably largely from last Fall, when the stock was falling from $40 to $25 or so (that was covered pretty well in this Barron’s article on “the Anti-Amazon” if you’d like some perspective).
At Home is, as they describe themselves, “The Home Décor Superstore”… I’ve never been in one, and the photos I’ve seen call to mind an aircraft hangar-sized Pier One, but here’s how they describe themselves:
“At Home, the home décor superstore, is one of the fastest growing retailers in America offering more than 50,000 on-trend products to fit any room, style and budget. At Home is dedicated to inspiring customers to create a home that reflects their unique personality and style, both inside and out. As a value-oriented fashion retailer, At Home gives customers a broad and comprehensive offering and a compelling value proposition, making it a leading destination for home décor. At Home is headquartered in Plano, Texas and currently operates approximately 180 stores in over 30 states.”
So what happened this quarter? Well, here’s the press release from this morning, but it looks like they came in with earnings about as expected for the quarter (three cents a share, adjusted), and with revenue slightly above expectations as they opened a bunch of new stores, but the comparable store sales were down (by 0.8%, so not dramatically — but down is always bad), and, more importantly, they dramatically downgraded the net income expectations for their fiscal 2020 (which is right now, they just reported their first quarter of FY20).
And Hilary Kramer was right — the expectations were already somewhat reduced thanks to their expansion, partly because of new lease accounting and partly because of the substantial near-term impact on earnings of building out their new distribution center. So the stock was a little soft over the last couple months as that “speed bump” was absorbed… but this is something else.
That cut to future expectations is now truly dramatic — they anticipate going from adjusted earnings per share of $1.30 last year to 67-74 cents this year, with part of that being a 14 cent hit to earnings from the opening of their second distribution center (analysts had been expecting lower earnings in this fiscal year with the expansion, but their guess was still over a dollar before today).
A lot of that seems to be a follow-on from the weather-related impact in this first quarter, which has them slashing prices to clear inventory for the fall buying season — they are definitely a victim of Chinese tariffs, but they said they managed through the 10% tariffs last year by “value engineering” and cutting corners elsewhere, but will take most of the hit from the 25% tariffs this year directly to their bottom line because they don’t think they can raise prices.
So that’s where you can lay the blame for the collapse in the stock price — investors care about earnings, and if your earnings are going to be cut in half, well, expect the stock to be at least halved as well, particularly if the drop is seen as more than a one-time bad news blip.
The big challenge that stands out for me, regardless of whether their comparable store sales are up by one percent or down by 1 percent, is that their gross margin is projected to go from 33% last year to 29% this year… a little bit of that (1 percentage point) is from accounting for their distribution center costs, but that’s a huge move when you’re talking about the top line. That ~10% drop in their gross profit (revenue minus the cost of goods) might not sound that huge, but it’s a fairly low margin business already — that would have been enough to turn their net income margin roughly from 4% of revenue to 1% of revenue last year. “Gross margin goes from 33% to 30%” sounds a lot less dramatic than “net income drops by two thirds,” but in this case it means about the same thing. And it sounds like a lot of that can be laid directly at the feet of the 25% import tariffs, so I guess we’re also dealing with investor pessimism about those tariffs becoming a permanent part of the economic picture.
One might hope that since HOME knew they would be shocking investors, and were issuing dramatically lower guidance, they are also being very conservative and lowballing that guidance — they probably really don’t want to come back to investors and discuss how they missed the much-lower guidance next quarter… but you never know. At this rate, if they can earn 70 cents a share this year (that’s the midpoint of the new guidance for adjusted earnings), then they’re currently trading at 11X current year earnings. That’s not necessarily cheap if they don’t grow from here, and it will be a little while before we see the analysts start to issue new earnings guesses for future years, but if they can re-ignite their growth potential and keep opening stores quickly I can see a possibility that it works out. They are opening more stores than ever this year, with 32 net new stores, and most of those will open in the first half of the year… but, as a retailer, they will also likely get 2/3 of their earnings in the fourth quarter, so for the remainder of this year a lot will be riding on what they say about the fourth quarter in future guidance.
In cases like this, though, with a stock that people were happily buying at $20 a week or two ago the tendency is to look at it with trembling fear at all-time lows around $7.50, you’re betting on a quick recovery from their disappointing results here… and the ability of the company to manage through a bad patch, clearing out old inventory while also growing, and that probably also means you’re counting not just on trade sentiment to possibly improve for those tariff hits, but also on the housing economy continuing to be pretty strong.
So it’s a tough call… if they can really operate well and get those new stores opened and mitigate some of the tariff increases and stay profitable, then there’s definitely some long-term potential as long as the basic retail experience is positive (happy customers, appealing stores, unique offerings or assortments, good prices) and, of course, as long as the economy is steady enough for a home decor retailer to keep sales churning along. They are opening genuinely massive stores and doing the appealing “regional to national” expansion that can be really profitable when it works. They started out from their Texas base and grew into the midwest and southeast, and in the last couple years have expanded big into the northeast, with California being the next big expansion target (they have their first CA store this year). I’d suggest checking out their pre-quarter investor presentation here (from April), which still had the flavor of optimism to it, and also the comments and Q&A on their conference call this morning.
There is no lack of competition in this space, from local decor and furniture retailers to the discounters like Target or TJX (which owns Home Goods) and online retailers, including the sector-specific giant Wayfair (W) that is challenging Amazon (AMZN) in furniture and, unlike HOME, gets the “you don’t have to be profitable as long as you’re growing fast” pass from investors (W is growing revenue at about 40%, vs. 20% for HOME, and has lower gross margins). I don’t really have any qualitative opinion on At Home and their relative appeal to consumers, having not spent much time in any of these stores, but clearly they’ve been able to open stores successfully and have kept their sales growing nicely. If they can get back to same store sales growth this year (they’re guiding to a -1% to +1% change in same store sales), and continue opening new stores at this clip, there ought to be a point where the stock is worth the risk.
So, for example, are you happy with a company that has some proven sector dominance like TJX, trading at 19X current-year earnings, or do you want to take a chance on growth with a much younger company that’s expanding faster and is a lot less predictable, but is now at 11X current-year earnings?
I don’t know, really. Whether we’re at that “it’s worth the risk” point at $7.50 today is your call to make, since it’s your money at stake… but this is no longer Hilary Kramer’s “5X faster than Amazon” story about a dominant emerging retailer, it’s now back to being a furniture and decor retailer that’s operating on the knife edge thanks to a bad-weather spring, a little economic uncertainty, and a nasty import tariff that’s eating their margins.
I have to admit to being tempted, the top line has not withered away so there’s no obvious sign that the business is failing, and my inclination therefore is to think that the selloff is overdone, since they do have the financial wherewithal to keep the expansion going — so to sharpen my thinking, I’m buying a very small position while I do that research… and I’ll let you know what I think. I’ve been tempted by the “falling knife” many times, and it often doesn’t work out, so make sure to follow your own comfort level. Momentum is bad, the technicals are bad, I imagine all the possible chart patterns you could imagine using are bad, if this works it will likely be because the economy and weather are not terrible, and the new stores they open this year are as popular as the previous year’s additions.
And that’s all I’ve got for you today, dear friends — feel free to opine on HOME or Hilary Kramer or whatever else you think is relevant with a comment below… thanks for reading!
Disclosure: Among the stocks mentioned above I own shares of Apple, Amazon and Five Below, and just purchased a small position in At Home Group. I will not trade in any stocks covered for at least three days following publication, per Stock Gumshoe’s trading rules.